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Madoff Investor Loses Bid to Recover Funds Transferred Just Days Before Ponzi Scheme Unraveled

Feb 25, 2009 | Parker Waichman LLP The claims of a Bernard Madoff investor who put  money with the accused Ponzi schemer just days before his arrest will not take precedence over the claims of other Madoff clients, a court has ruled.  According to The Wall Street Journal, a federal bankruptcy judge in Manhattan has dismissed a lawsuit filed by Martin Rosenman that sought to have $10 million that he had transferred to Madoff returned.

Madoff - once a chairman of the Nasdaq stock exchange - was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm was primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately.

Madoff was arrested on one count of securities fraud on December 11.  According to The Wall Street Journal, Rosenman, who is managing member of Rosenman Family LLC, transferred $10 million to Madoff's firm on December 5.  His lawsuit asserted that the  firm never "obtained legal, beneficial or equitable title to these funds," the Journal said.

But the trustee overseeing the liquidation of Madoff's assets asked that the suit be dismissed.  In his ruling, the bankruptcy judge agreed, writing that Rosenman's claim was "indistinguishable" from other similarly situated customers of the Madoff firm and there was no basis for giving him special treatment to recover the funds deposited for investment.

Unless he chooses to appeal, the dismissal means Rosenman's claim will be handled just like those of other Madoff's investors.  They are eligible for a portion of any funds recovered from the liquidation of Madoff's assets, and they could also receive as much as $500,000 from the Securities Investor Protection Corp., or SIPC.

At a meeting last Friday, the trustee told investors that so far he had recovered about $950 million from Madoff's assets - a fraction of what they have lost.  Investors were also told that the trustee would seek to recover phony profits earned by some investors so they can be redistributed to others.  An attorney working for the trustee pointed out that any such profits were “just made up”, and the investors who received them “got somebody else’s money.”

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